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Directors & Officers Liability Insurance Market Update
INSIGHTS MAY 2018
ii | Directors & Officers Liability Insurance Market Update
Directors & Officers Liability Insurance Market Update | 1
Insurers seek to mitigate exposures amid rising claims activity The insurance market in Australia for professional indemnity,
directors and officers liability and financial institutions is more
challenging than it has been in the past decade. Driven by
an abundance of claims, the number of claims and reported
circumstances are exceeding the total insurance market
premium pool by a significant margin. Some leading insurers
have struggled to adjust to the current market and economic
conditions and are either seeking to mitigate their exposure via
reduced capacity or elevating their attachment points. In some
cases, insurers are electing to exit market segments altogether.
Notably, buyers that operate in sectors now deemed medium or
high hazard are facing insurers exerting significant pressure for
higher deductibles and premiums to be applied on both renewal
and new business.
MARKET CAPACITY AND APPETITE
Insurance capacity continues to be generally available for all the
relevant D&O sectors, but for a price. Insurers are declining to
renew programs where they cannot achieve their required premium
increases, and product line underwriters are under intense scrutiny
from management to be unyielding on pricing improvement.
Insurance placement has therefore become challenging, in
particular for clients purchasing cover for Security Entity claims
(shareholder class action). There is now very limited insurer
appetite for Security Entity Cover (Side C) insurance locally or
in international markets for Australian risks attaching under
$100M. Currently premiums above $100m attachment remain
stable but with major global insurers now looking more closely
at their cost of capital, change may be on the way. Conversely,
insurance premiums below $100m are rising substantially albeit
not to levels forecast by insurers and actuaries.
Number of securities class action claims in AustraliaFIGURE
Source: Marsh data
1999 – 2006 2007 – 2011 2012 – 2016 2017 2018 (pending)
2 per annum (average)
4 per annum (average)
6 per annum (average)
10 per annum
16 per annum
2 | Directors & Officers Liability Insurance Market Update
IMPROVING D&O RISK PROFILE
Whilst many of the current risk drivers affecting premiums are not
within control of buyers, there are factors to focus on that may provide
an improvement in the premium offered by insurers.
The following items may positively influence Insurers’ perception
on risk, potentially offsetting the impact of the general drive to
increase the premium pool size to manage risk and class volatility:
• Business complexity and transparency of the company’s financial condition
• Internal company controls and review (and subsequent disclosure implementation)
• Director quality and board independence
• Market capitalisation
• Company culture
Despite the significant, year-long pricing correction from the
existing market leaders, management liability portfolios are only
just beginning to stabilise with loss ratios expected to break
even some time in the second half of 2018. Local insurers have
expressed the view that the pricing correction has not been
sufficient to attract their participation, and thus competition,
against the existing market leaders.
Financial institution insurers are also experiencing similar tough
insurance conditions as evident in the PI and D&O market. The
frequency of current claims and increased costs of defending
regulatory investigations, such as the current Royal Commission,
are dwarfing the current FI insurance premium pool estimated at
$250m. Many insurers claim to having not made a profit in the FI
space for over 10 years.
1. How did we get here? The history and development of securities; Show me the money! The impact of securities class actions on the Australian D&O liability insurance market, XL Catlin and Wotton & Kearney, 2018
In their recent white papers1, XL Catlin and Wotton & Kearney
have sought to set the tone of the conversation for some of
the factors affecting listed companies and security entity
claims in Australia.
There is a strong view amongst insurers that the market is
dramatically under-priced and that premiums need to increase
in multiples to return the market to profitability. Actuarial firm
Finity Consulting’s recent “Show me the numbers” assessment
at the National APIG Conference in September 2017,
suggested that the local D&O insurance market remains 100%
under-priced but 250% under-priced on ASX listed programs,
in particular those with Security Entity Cover (Side C).
While class action claims are driving a specific response due
to their severity in a relatively small Australian D&O premium
pool, the frequency of such claims, albeit increasing, remain
significantly below what is experienced in the US and some
To some degree, the D&O policy is now acting as a de facto
“corporate guarantee” and, with this trend, the relatively
modest local premium pool must become larger or be
diversified into global markets - with premium rates reflecting
US and European risks - if the market is to remain functional.
Recent court decisions continue to demonstrate that
Australian companies are subject to a strong regulatory
environment, which in turn encourages local and
international investment in Australian companies. As the
claims experience resulting from these more stringent
standards comes into alignment with regimes abroad, it is
now apparent that D&O premiums in Australia are beginning
to reflect closer to prices charged in the US and some
IMPACT OF CLASS ACTION CLAIMS
Directors & Officers Liability Insurance Market Update | 3
2. Optima Lite 2017
Looking ahead The market looks set to continue seeking price increases through the rest of 2018, even
if the class action activity proves to have peaked. Indeed, in their most recent market
assessment , Finity Consulting suggests that even after the most recent round of
increases, another 35% - 55% would be required to stabilise the local D&O market.2
Given so many past and current class actions centre on the company’s attitude towards
risks and continuous disclosure, it is only logical that insurers are seeking to better
understand both the Board and management’s practices in this regard. Specifically,
insurers are keen to understand the framework for disclosing risk, including timing to
provide revise guidance back to the ASX for key metrics.
Insurers are also showing greater interest in a company’s remuneration guidelines
for short and long term incentives, and whether there have been changes over the
As the cost of Security Entity Cover (Side C) increases and availability becomes tighter,
many buyers will be carefully re-evaluating their company’s decision to continue to
purchase this cover. This may reignite the age-old debate of needing to balance the
company interest against that of directors and officers.
For many, the insurance program still represents significant value, with some programs
still more affordable now despite the current claims environment, than five years ago,
when coverage also had lower limits.
We expect insurers to continue recalibrating upwards in both pricing and deductibles
while claims activity will be more closely scrutinised.
About Marsh: A global leader in insurance broking and innovative risk management solutions, Marsh’s 30,000 colleagues advise individual and commercial clients of all sizes in over 130 countries. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With annual revenue over US$14 billion and nearly 65,000 colleagues worldwide, MMC helps clients navigate an increasingly dynamic and complex environment through four market-leading firms. In addition to Marsh, MMC is the parent company of Guy Carpenter, Mercer, and Oliver Wyman. Follow Marsh on Twitter @MarshGlobal; LinkedIn; Facebook; and YouTube, or subscribe to BRINK.
Disclaimer: Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) arrange the insurance and is not the insurer. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. The information contained in this public